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Small Business

What do you know about your business partner? How to avoid getting burned

One of the most important hubs on the road to small business success – and one that almost every entrepreneur will encounter at some point – is incredibly treacherous: deciding whether to hire a partner. The way you navigate it can make the difference between success and total disaster.

Done well, a partnership can take your business to new heights, adding not only someone to share the work, but also a new perspective, new expertise and, potentially, new financial support.

“A partnership could mean that your business will gain access to new products, reach a new market, block a competitor through an exclusive contract, or increase customer loyalty,” said the National Federation of Independent Businesses, a small business advocacy group, in a blog. Publish.

But business partnerships can also be disastrous. In one of the most extreme examples, Chris Smith of California was found dead after a dispute with his business partner, Edward Shin. The two had co-founded 800XChange, which specializes in generating leads for clients in the debt consolidation industry.

Shin, now 43, is serving a life sentence without parole after a jury in Orange County, Calif., Found him guilty in 2018 of first degree murder. Prosecutors alleged that Shin committed the murder after Smith discovered his scheme of taking hundreds of thousands of dollars from 800XChange to pay off a previous felony conviction. Shin then covered up the crime for months by posing as Smith in emails to family members, claiming he was sailing around the world on a yacht.

“You really have to put yourself in this situation. How would I feel thinking that I am talking to my son and that this is the very person who killed him? Private investigator Joe Dalu, who helped solve the case, told CNBC’s “American Greed”. “Leading them, keeping that hope, is really evil.”

Shin even used the trick of e-mails to negotiate a “deal” to dissolve 800XChange on terms favorable to him.

Smith was 33 when he was last seen in 2010. His body has never been found.

Failure rate

While most partnerships do not end in such a tragedy, 70% fail within 10 years, according to the US Bureau of Labor Statistics.

To increase the chances of your partnership succeeding – and to make things less painful if it fails anyway – experts say it’s crucial to have a formal agreement with your partner up front.

“There are a lot of businesses that are dealt with purely on the basis of handshakes and in good faith. And unfortunately that often leads to some pretty messy situations where things don’t go well,” said lawyer Andrea. Tarshus to “American Greed”.

Tarshus, who is based in Buffalo, New York, specializes in small business services.

She said a written agreement should spell out the company’s legal structure. The Small Business Administration says it’s important to understand the different forms a business can take because in some cases one or more partners may face unlimited personal liability if something goes wrong.

A limited partnership or limited liability company can, as the name suggests, limit this liability. Or you can form a corporation, which protects owners from personal liability. There are different types of companies depending on the nature of your business.

Each structure has advantages and disadvantages and tax implications. This is another reason why experts say you should consult a lawyer before opening your business.

It’s also a good idea to include guarantees in your new firm’s governing documents, such as caps on how much a partner can spend or withdraw on their own.

“When one of the partners goes out and makes a huge transaction or a purchase, or agrees to spend a certain amount on a project, or to buy equipment, or to sell a property or to acquire a property, the other partner is sitting there going, ‘Why would you want to do this without taking care of it first?’ “Tarshus said.” Well, if you have a cap built into your corporate governance document, that would prevent this type of problem from happening even in the first place. “

Trust, but verify

You might think you know your potential business partner, but would you be willing to bet all you have on them?

Otherwise, check them carefully.

This includes checking references and credit scores. It may also be a good idea for each of the partners to agree to undergo a criminal background check.

“Criminal background check, reference check, resume check, then even asking them if they are willing to share their personal tax returns for the past three to five years, this will give you a better idea of ​​their ability to handle.” company funds and what their personal history looks like to manage their own income, ”Tarshus said.

If your partner doesn’t want to open up, that in itself could be a red flag, experts say. You should be just as open in sharing your information

“If a person is unwilling to share or be vulnerable with you or let you take a look at their privacy, then it would really give me the caution to enter into a business relationship with them. “said Tarshus.

Smith and Shin had met while working at another lead generation company in Southern California. While it’s not clear to what extent Smith did his due diligence before the two went into business together, he took precautions, including hiring his own lawyer.

But Shin, a skilled impostor who cultivated an image of a practicing family man but was in fact a con man with a gambling problem, structured the business so that Smith’s ownership was just below 50%, unable to access company accounts.

Eventually, investigators told “American Greed,” Smith grew suspicious. He demanded that Shin give him the passwords for the company’s bank accounts, as well as the co-signing authority on all checks over $ 10,000. And he emailed his lawyer about his partner’s mistrust.

“We have to make sure there is no room for fraud,” Smith wrote.

Soon after, Smith was dead.

Find out how investigators finally uncover the trail of deception, embezzlement, and ultimately murder of Ed Shin. Watch a BRAND NEW episode of “American Greed,” Monday, June 28 at 10 p.m. ET / PT only on CNBC.

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